in which you sell a line of beverages in bottles; by outsourcing production to a co-packer and now that the product has proven to be desired by consumers you are ready to install the process in a factory of your own. There are two pieces of equipment with which to produce and package bottles namely, 1) RKA Jones and 2) Food Machinery Corporation (FMC) and both machines have the same output in terms of numbers of bottles. The life of each machine is similar at 3 years. In the current business environment, you think that you can make 7% return on investment. The following information has been developed by your finance, purchasing and engineering employees:

Cost Element	RKA Jones	FMC
Cost of acquisition	$20,000	$16,000
Labor cost per year	$2,000	$3,000
Floor Space per year	$500	$600
Energy (Electricity) use per year	$1,600	$700
Maintenance per year	$2,500	$800
Total Annual Cost	$6,600	$5,100
Salvage Value	$2,500	$1,500

1. Based on the above information, determine via the Present Value Method which machine to buy. Explain your decision!
2. In this problem, we are only considering the Total Cost (Fixed Cost + Variable Cost) so explain why this approach is appropriate and eliminates the need to use Profit (Profit = Revenue- Total Cost) for decision-making ?
3. What would the Total Profit be for each machine over its 3-year lifetime if the price charged each year is increased to offset the effect of declining “Time Value of Money” to keep Revenue at $100,000 per year in constant $dollars.

Answer rating: 100% (QA)

Machine 1 Years 0 1 2 3 Purchase price 20000 Cost 6600 6600 6600 Discount factor 7 1 0934579 0873439 ... View the full answer